NZD/USD At Risk For Pull Back If Risk Appetite Wanes

The NZDUSD has eased from its yearly high of 0.7313 but it remains in a clear upward trending channel as risk appetite and rising interest rate expectations have fueled demand for the high yielding “kiwi”. Risk sentiment remains the main driver of price action explaining 56% of volatility.

[B]NZD/USD[/B]

The NZDUSD has eased from its yearly high of 0.7313 but it remains in a clear upward trending channel as risk appetite and rising interest rate expectations have fueled demand for the high yielding “kiwi”. Risk sentiment remains the main driver of price action explaining 56% of volatility. Commodity prices traditionally have a significant influence over the pair’s direction but we have seen that relationship fade as interest rate expectations and risk sentiment grow in importance. New Zealand interest rate at 2.50% trail only Australia amongst the majors and with growth returning in the second quarter, expectation are that the RBNZ will be forced to begin tightening to avoid inflationary risks, The prospect of higher yields will make the “kiwi” more attractive for aggressive investors and will increase the influence of yield expectations on the pair.

[B]RBNZ Interest Rate Expectations[/B]

The New Zealand economy unexpectedly expanded in the second quarter bringing an end to the country’s worst recession in three decades. A rise in consumer spending and demand from abroad for timber and dairy products helped create growth for the first time in six quarters. This has raised expectations that the central bank will start to consider initiating a tightening policy for interest rates. Overnight index swaps were pricing in as much as 150 bps in rate hikes over the next twelve months. Lingering concerns over the global economy has tempered expectation a bit. Regardless, the RBNZ is expected to one of the first central banks to raise rates enhancing the “kiwi’s” attractiveness when confidence is rising.

[B]FOMC Interest Rate Expectations[/B]

Fed funds futures are currently pricing in a 0.0% chance of a rate hike by the end of the year after the FOMC left rates unchanged Wednesday and reaffirmed its commitment to keep them low for an “extended period”. The central bank also pledged to fulfill its current asset purchase program of $1.25 trillion but extended its end date to March from December. Spreading out the stimulus efforts is an attempt to keep support under the housing sector but will also extend the horizon of when markets may expect tightening to begin. This could maintain the greenback’s status as a funding currency and as long as risk appetite remains strong it will see continued weakness.

[B]Commodities[/B]

     The pace of improvement of global cyclical indicators has started to slow which is reinforcing the argument that a recovery will be protracted which has started to weigh on commodity prices. Indeed, we saw an unexpected drop in U.S. durable goods orders today which followed misses in U.S. housing data and Euro-Zone manufacturing. Raw materials had found support on the back of a pledge from global leaders to maintain stimulus efforts in order to ensure a return to growth. However, despite the unified commitment to promote growth at this week’s G-20 meeting, it was evident that real concerns remained over another possible downturn if unemployment continues to rise. Therefore, we could see traders look to take profits on the recent rise in commodity prices which could translate into the same for the NZD/USD.    

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